Divorce Taxation. What You Need to Know.

There are various tax issues that I am usually confronted with when dealing with a divorce. The tax issues to consider are the filing status, dependents, alimony vs. child support, property settlements, standard vs. itemized deductions and qualified retirement plans including IRA’s.

Couples that are separated may file married filing separate, married filing joint or head of household. Head of household requires you live apart from your spouse for the last six months of the year and pay over half the cost of maintaining a residence for a child who is eligible to be your dependent. Your marital status for the year is determined by your marital status on the last day of the year.

Generally, you can claim a dependent if you were designated the custodian by court order. If no agreement is present, then the custodian parent may claim the dependent.

A spouse that pays alimony is allowed a tax deduction whether they itemize or take the standard deduction. The receiving spouse must report the alimony as income. Child support is not income to the receiving spouse and therefore not deductible by the paying spouse.

Property settlements between spouses are considered tax-free transfers, but the spouse receiving appreciated assets will inherit the existing basis and holding periods. This means upon the sale of those assets the individual may have a taxable transaction.

Spouses that file separate tax returns must both use the standard deduction or itemize their deductions.

If qualified retirement accounts are part of the marital assets, the individual should consider a QDRO (Qualified Domestic Relation Order) to prevent a taxable transaction on the transfer of the retirement accounts. QDRO is not needed for an individual retirement account to get a tax-free transfer.

Attorney’s fees related to the divorce are not tax deductible, unless it relates to your taxes.

The above is only a general overview of the tax issues involved in a divorce situation and is not a replacement for consultation with your attorney and accountant.